Student loan rehabilitation allows you to get out of default by making affordable payments.

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If you are in default on federal student loans, a federal program called student loan rehabilitation provides you with a way to get your loans current by making affordable payments. Student loan rehabilitation has a number of benefits. Unfortunately, many borrowers misunderstand this program and many lenders and servicers misrepresent how student loan rehabilitation works. Be sure to understand this powerful program if you are in default on your student loans.

What Is Rehabilitation?

Rehabilitation is a program where a student loan borrower who is in default on federal student loans makes nine payments over ten months (note that the program allows you to skip a month, or be late with a payment), in order to become current again. You cannot speed up the rehabilitation time by prepaying, for example, by paying all nine months payments at one time.

If you have a direct loan (a loan made directly by the federal government), after your ninth payment, your loan is rehabilitated, you are out of default, and you are considered current. If you have an indirect loan (one guaranteed by the federal government, also called a FFEL loan), the guarantor must sell your loan to another buyer before the rehabilitation is complete. You have to keep making payments until this happens, which means you could end up making more than nine of the affordable payments.(Learn about the different types of federal student loans, including direct and indirect.)

While you are making rehabilitation payments, the lender or servicer can still legally make collection calls or send letters, but often will refrain from doing so.

You are only permitted to rehabilitate once. This means that if you rehabilitate your loan, and then default, you cannot rehabilitate again.

How Much Are Rehabilitation Payments?

By federal law, your payment amounts under a rehabilitation program must be “reasonable and affordable” for you. This means that if you are unemployed, or earn little money, your rehabilitation payment may be as low as $5-$10.

Federal law does not define what “reasonable and affordable” payments are. Federal law does, however, require that items like disposable income, utilities, food, medical expenses, expenses for dependents, work expenses, and housing, be considered in determining what a reasonable and affordable payment is. Student loan payments that you owe to other lenders (for example, a private student loan payment) also must be considered. As long as your expenses for these items themselves are reasonable, then you are entitled to as low of a payment as necessary for the payment to be affordable to you.

Unless your rehabilitation payment will be below $50, you do not have to provide documents to the lender or servicer to justify your financial situation. Most servicers will simply interview you by phone, and ask you about your income and expenses. It is important to be prepared with a budget of your expenses when you speak to your lender or servicer, so that you are prepared to give a complete picture of your financial position.

The payment amount, and determining a reasonable and affordable payment, is the largest point of dispute between consumers and lenders. When a consumer can only afford a very small payment, many lenders, servicers or collectors will often say things like:

“Because of the size of your loan, we can’t give you payments that low.”

“The lender’s guidelines don’t allow payments that low.”

“The lender doesn’t follow those guidelines.”

“The minimum payment must be $X.”

These statements are false, and as long as the payment amount you are requesting is genuinely all that is affordable, you should not give in to your lender or agree to payments that are more than you can afford.

Once you have agreed to a rehabilitation payment, you should get the agreement in writing. Federal law requires that lenders or servicers put the agreement in writing, so many have such forms already prepared. Payments made without a written confirmation of your rehabilitation plan, may not be credited towards your rehabilitation.

Wage Garnishments Don't Count As Rehabilitation Payments

Because rehabilitation payments must be voluntary payments, wages taken through an administrative wage garnishment do not count towards rehabilitation. However, your lender must take into account moneys being garnished when determining what a reasonable and affordable rehabilitation payment is for you.

For example, if you can only afford $300, and $250 is being garnished from your paycheck, the lender or servicer can only require an additional $50 as the rehabilitation payment. If your wages are garnished in the amount of $300, your rehabilitation payment could be as low as $5-$10.

What Loans Can Be Rehabilitated?

Any federal loan can be rehabilitated. It does not matter what kind of federal loans that you have. Private loans cannot be rehabilitated, as there are no laws directing what private lenders can and cannot do. (Learn the difference between federal and private student loans.)

The Benefits of Rehabilitation

The biggest benefit of rehabilitation is that once your loan is rehabilitated you are eligible for an income-based repayment program. (Learn about income-based student loan repayment programs.) Your rehabilitation payments may end up being very close to your actual ongoing payments once your loan is rehabilitated.

Another benefit may be slight improvement of your credit. Once completed, rehabilitation removes all notations of default from your credit report. However, other negative credit markings, such as those showing you were 30, 60, or 90 days late with payment, will remain. The improvement will likely be slight, and not a complete elimination of all negative markings on your credit, as many collectors misrepresent to consumers.

For borrowers who have an administrative wage garnishment against them, the garnishment will stop once the loan is rehabilitated.